Blue Shield, UniHealth Plan Giant Merger
Blue Shield of California and UniHealth America said Monday they plan to form a $6.5-billion managed-care organization that would rival giant Kaiser Permanente and let members choose between traditional health delivery and HMO-style medical care.
The merger--probably the largest ever among California health-care firms--is a sign of the consolidation sweeping the industry as the nation’s medical costs soar and the Clinton Administration struggles to develop a reform package.
The as-yet-unnamed nonprofit organization would include key components of both Blue Shield and UniHealth and serve as many as 4.5 million people in California, officials of the firms said.
The power of the proposed merger would be in the new company’s combining of Blue Shield’s traditional indemnity insurance programs with UniHealth’s direct medical services, including hospitals and health centers.
UniHealth also would contribute two large health maintenance organizations--CareAmerica Health Plans of Chatsworth, which it owns, and PacifiCare Health Systems of Cypress, of which it is a major shareholder.
As national reforms take hold, health care experts say the most successful providers will be large conglomerates that offer their members broad choice and access to emerging services such as home-health care and outpatient surgery.
“I think we can expect more of this if we move into a managed competition environment,” said Judith Bell, director of the West Coast regional office of Consumers Union in San Francisco.
In light of ongoing reform efforts, officials of both companies said their best way to ensure survival was to join forces.
“A consolidation at this time will best position the new organizations to respond most effectively to a changing health care environment,” said Terry Hartshorn, chief executive officer of Burbank-based UniHealth.
The two firms expect that members of their health plans will be able to select among the merged organization’s service options, but details have not been worked out.
In the choices it offers consumers, the new nonprofit organization could surpass the industry’s largest provider, Oakland-based Kaiser Permanente. Kaiser serves 4.6 million Californians through its network of hospitals and clinics, but does not operate an indemnity insurance plan such as Blue Shield’s.
Kaiser spokesman Jerry Ashford said the merger would create “a formidable health care provider,” but insisted that Kaiser would remain the state’s largest and strongest medical organization.
Nevertheless, he acknowledged that a firm operating at least five health plans and 11 California medical centers--including Long Beach Community Hospital, Martin Luther Hospital in Anaheim and Northridge Hospital Medical Center--would be a major rival.
The deal--which requires state and federal approvals as well as approval by the national Blue Cross and Blue Shield Assn.--is expected to close by the end of the year, officials said.
As the merger now is conceived, the new company would become the parent firm of the existing Blue Shield and UniHealth organizations, said Peter R. Scott, chief executive of San Francisco-based Blue Shield. Blue Shield would be its chief operating entity, with responsibilities for both its own health plans and those offered by UniHealth.
“We think the Blue Shield name is very important to this company,” Scott said.
Although the health care industry has been consolidating, this deal caught analysts off guard. Some did not want to discuss it, because they did not know enough about UniHealth and Blue Shield, both of which are privately held, nonprofit companies.
Eleanor H. Kerns in Boston, an analyst with Alex. Brown & Sons brokerage, said she was “intrigued and surprised” by the merger.
Kenneth S. Abramowitz, an analyst with Sanford C. Bernstein & Co. Inc. in New York, viewed the consolidation as a good way to reduce costs and build a stronger company. Abramowitz said the competitive scene suggests there will be little conflict between publicly held PacifiCare and its new sister company.
“The HMOs in California now represent about 30% of the people,” he said. “The market share is on its way to 70% to 80%, so there’s still plenty of room for both companies to do well.”
But Consumer Union’s Bell worried that the trend toward consolidation could be detrimental to patients.
“The big question here is whether we end up with so much consolidation that consumers won’t be left with any choice in the market,” she said. “This transaction itself won’t result in that, but it remains to be seen how many of these mergers will follow.”
The new company will work closely with PacifiCare to avert conflicts of interest that could harm the for-profit HMO company’s shareholders, officials said.
PacifiCare would continue to operate independently of the new firm, said Hartshorn, who is PacifiCare’s board chairman and has been named chief executive officer of the new entity.
UniHealth owns just more than 50% of the HMO’s voting stock but now also would be operating a strong competitor.
PacifiCare President Alan Hoops acknowledged that the potential for conflicts is substantial. But he said the firm’s experience in operating both CareAmerica and PacifiCare had heightened executives’ awareness of such problems. For example, the company relies on the three outside directors on its nine-member board to decide certain competitive issues.
Times correspondent David Tobenkin contributed to this story.
